Collections and debt management in UK personal lending

Published by: Datamonitor

Published: Feb. 25, 2009 - 28 Pages

Table of Contents

DATAMONITOR VIEW

CATALYST

SUMMARY

ANALYSIS

The personal loan market is bracing itself for rising impairments

Personal loan balances have grown partially due to higher default rates

Personal loan balances have grown while advances have fallen over the past 18 months

Arrears and delinquency rates will continue to rise during the recession

Impairment provisions will continue to grow as banks adapt to the worsening economic climate

Greater levels of lending in 2007 led to higher provisions for bad debt

As a percentage of total lending only a handful of lenders have increased their loan provisions

Most lenders will have increased their impairment provisions for 2008

Growing unemployment will result in a larger non-standard population adversely affecting impairments

Datamonitor predict that the non-standard population will rise to just over nine million by the year 2010

Prevention of bad debts is better than the cure in the current climate

Most banks have similar methods for debt recovery and collection

Determining customer intentions is crucial for future loan portfolio performance

Data sharing can reduce fraud

Stringent lending policies are often the best way to minimize potential defaults

Affordability measures offer a better assessment of a borrower's financial status

Inter-bank data sharing minimizes the risk of lending to new customers by reducing informational asymmetries

Financial advice could be one way to prevent borrowers from falling into delinquency

Lloyds TSB have further led the way for customer advice

In-branch financial advice is becoming more popular as consumers become increasingly worried about their debts

A delinquency needs to be identified and resolved as soon as possible

Quick identification of arrears and delinquency is the most important aspect of debt management

Experian's Tallyman is an advanced system that streamlines debt collection and recovery

Customer segmentation is vitally important in order to maximize debt recovery

First time impaired need to be nurtured by the bank to ensure a successful debt collection procedure

There are three main solutions for borrowers who fall into repayment difficulties

Debt management plans are suited to those with relatively low levels of debt

Alternatively, IVAs offer a solution for an individual faced with overwhelming debts from various creditors

Often bankruptcies are used as the last resort for those who are severely impaired

Third party debt collection agencies are used once all other options are exhausted

Growing pressure to treat customers fairly is an important consideration for DCAs

Secured personal loans eliminate any confusion as to what should happen should a borrower default

APPENDIX

Supplementary data

Definitions

Arrearage

Balances outstanding

CCJs

Delinquency

Gross advances

Impairment charge

Impairment provision

Non-standard

Secured personal loan

Unsecured personal loan

Methodology

Sizing methodology for the UK non-standard population

An element of subjectivity is needed with any definition of non-standard

Reasons for credit rejection

Elimination of double counting

Datamonitor uses seven steps to size the UK non-standard population

Step 1: The number of people in the UK of working age

Step 2: Absence of a bank account

Step 3: Unemployment

Step 4: Income support claimants

Step 5: County Court Judgments

Step 6: Mortgage arrears and repossessions

Step 7: Self-employment with less than three years' proof of income

Bankrupts are excluded because of double counting

Further reading

Ask the analyst

Datamonitor consulting

Disclaimer

List of Tables

Table 1: Loan impairment provisions for the main high street banks, 2005-07

Table 2: Personal loan gross advances and balances outstanding, January 2007-September 2008

Table 3: Loan provisions as a percentage of total lending, 2005-07

Table 4: The non-standard population, 2004-08

Table 5: UK non-standard population forecast under the Datamonitor view, 2008-13f

List of Figures

Figure 1: Unsecured personal loan advances have been falling while balances outstanding have grown, January 2007-September 2008

Figure 2: Only a few lenders increased their proportion of total loan provisions for impairments, 2005-07

Figure 3: 2008 witnessed a massive growth in the number of non-standard individuals, 2004-08

Figure 4: Under the Datamonitor view the non-standard population will increase significantly over the next five years, 2008-13f

Figure 5: Every bank aims to resolve a bad debt as quickly and effectively as possible, 2009

Figure 6: Lloyds TSB's budget calculator aggregates all outgoings thus providing a realistic budget representation for any consumer, 2009

Figure 7: Datamonitor's definition of non-standard

Figure 8: A certain degree of subjectivity is needed in a definition of the non-standard population because some lenders are inevitably willing to accept greater risk than others

Abstract

• Analyzes the current personal loan market performance and provides forward looking estimates for the non-standard population up to 2013.
• Assesses the process of debt management and recovery and provides analysis on how it can be enhanced throughout the current climate.

• Sizes and forecasts the non-standard population as well as providing historical data for the personal lending market in the UK.
• Describes in detail the process of debt recovery for borrowers who have fallen into repayment difficulties.
• Offers insight and recommendations for enhancing debt management and recovery strategies.

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